Minimum Global Rate of Tax on Multinationals

The three main rules of the global minimum tax are: The rules define the scope and establish the mechanism of the so-called Global Base Erosion (GloBE) rules under the second pillar, which introduce a global minimum corporate tax rate of 15%. The minimum tax applies to multinational companies with a turnover of more than €750 million and is expected to generate approximately $150 billion in additional global tax revenue each year. The U.S. would abandon the tax base it currently imposes with GILTI. In fact, the rules encourage countries to adopt QDMTTs that would apply prior to IIRs. Research by economists Michael Devereux, John Vella and Heydon Wardell-Burrus suggests that some jurisdictions prefer to levy corporate tax through QDMTT rather than even traditional corporate income tax. [15] The rules are quite complex. In principle, they allow the country in which the ultimate parent company is located (in Belgium in the case of a Belgian multinational) to tax that parent company directly on income received abroad, provided that such foreign income has been taxed at an effective tax rate of less than 15%. In addition, the rules are designed in such a way that if the country where the ultimate parent company resides does not apply these rules or if intra-group payments are made to the ultimate parent company that are subject to a low tax rate (at the ultimate parent level), the countries in which the multinational operates may claim this additional tax. It also introduces rules under which certain payments are subject to withholding tax if the recipient of the payment is not subject to minimum tax.

These rules are likely to trigger changes in local countries` rules and rates, especially in countries where tax revenue or business may be lost. The 2nd pillar is the global minimum tax. It contains two main rules, and then a third rule for tax treaties. These rules will apply to companies with a turnover of more than €750 million. The global minimum tax rate and other regulations aim to end decades of tax competition between governments for foreign investment. Together, the income inclusion rule and the undertaxed payments rule create a minimum tax for companies investing abroad and foreign companies investing domestically. They are both bound by the minimum effective rate of at least 15% and would apply to any jurisdiction in which a company operates. The OECD estimates that base erosion and profit shifting lose up to $240 billion in global tax revenue each year.

Multinational companies with a worldwide turnover of more than €750 million are subject to the global minimum tax. The introduction of such a tax will change the fundamentals of international taxation, and businesses should prepare for these new rules. They need to understand the potential impact on their organization, as these new rules may impact their global tax costs as well as their investment strategies and locations. As mentioned above, the tax base of the BBBA version of GILTI is also different from the model rules. Even if other jurisdictions increase their taxes through higher corporate tax rates or the introduction of QDMTT, GILTI could still apply due to its different structure and broader base. However, due to the lull in implementing the rules, U.S. lawmakers have an opportunity to pause and review the model rules while observing how other jurisdictions might implement the global minimum tax. This should provide lessons for a different approach to U.S. policy than that included in the BBBA. Several jurisdictions around the world have published consultation papers and strategy papers outlining challenges and options for implementing global minimum tax rules. Thus, if the BBBA is adopted, the US will move down the food chain to tax the foreign profits of US multinationals (behind foreign QDMTTs), and the US domestic tax base will remain exposed to the UTPR.

Note: This article was originally published on July 1, 2021, but has been updated to reflect the latest details of the global tax treaty. While a global minimum corporate tax would apply a certain minimum tax rate, its overall design could take different forms and have different effects. In general, the most discussed feature of a tax system beyond the tax rate is the definition of the appropriate tax base. In theory, income tax should be levied on a taxpayer`s net economic income. But an agreement on what constitutes such income is elusive, if not impossible.